InsiderOnline Blog: March 2009

The President and the Congress think cracking down on tax cheats is a $300 billion-plus pot of money for the federal budget, but data on compliance costs suggest greater enforcement efforts are already near a point of diminishing returns. Last week, President Obama appointed Paul Volker to head a task force that will focus on closing the so-called tax gap, which is the difference between what the Internal Revenue Service says taxpayers owe and what they actually pay. The task force is supposed to report to the President by December 4. One idea likely to be on the table is creating more reporting requirements for taxpayers.

When this issue last hit the news in 2007, the IRS estimate for the tax gap was $290 billion. At that time, however, the Tax Foundation estimated that the cost of complying with the tax code was $278 billion. In other words, honest taxpayers spent nearly as much complying with the tax code as the IRS estimated that taxpayers underpaid their taxes. The Tax Foundation estimates that in 2009, the costs of tax compliance will be $347 billion. Any efforts to close the tax gap with greater enforcement will necessarily increase those compliance costs.

Compliance costs are large because the tax code is very complex. In 2006 testimony, the Treasury Inspector General for Tax Administration reminded Congress of the findings of its own Joint Committee on Taxation:

In 2001, the Joint Committee on Taxation conducted a study on the complexity of the tax law. The Committee found that, at that time, the tax code consisted of nearly 1.4 million words. There were 693 sections of the code applicable to individuals, 1,501 sections applicable to businesses, and 445 sections applicable to tax exempt organizations, employee plans, and governments. At that time, a taxpayer filing an individual income tax return (Form 1040) could be confronted with a 79 line return, 144 pages of instructions, 11 schedules totaling 443 lines (including instructions), 19 separate worksheets embedded in the instructions, and the possibility of having to file numerous other forms.

According to the National Taxpayer Advocate, 94 percent of non-compliance with the tax code consists of honest mistakes by taxpayers. Adding new reporting requirements might decrease the number of tax cheats, but it will come at the cost of increasing the already high paperwork burden on honest taxpayers.

Recent news on North Korea’s plans to launch a ballistic missile sometime between April 4 and April 8:

• Daniel Pinkston, a senior analyst with the Brussels-based International Crisis Group, says intelligence officials have told him they believe North Korea has five to eight nuclear warheads that could be fitted onto its medium-range Rodong missiles. Pinkston did not identify the country for whom the intelligence officials worked.

Update: The Associated Press reports Pinkston “stressed it is unclear if the communist nation has mastered the technology necessary to miniaturize the warheads and put them on Rodong missiles ...”

• “Should Japan dare recklessly to intercept the DPRK’s satellite,” warned the North Korean government, the North Korean army “will consider this as the start of Japan’s war of reinvasion more than six decades after the Second World War.” The statement, issued today through the state-controlled Korean Central News Agency, also alleged: “The primary aim sought by Japan through this is to bring the six-party talks to collapse and delay the denuclearization of the Korean peninsula and thus justify its ambition for nuclear weaponization.”

• North Korea has put all regular and reserve forces on combat alert, says a South Korean aid group with contacts in North Korea. The Straits Times reports that, according to the group Good Friends, all regular soldiers have been confined to barracks and reserve forces have been alerted. The government has forbidden all men from traveling far from their homes.

• North Korea said it intends to put two American journalists on trial for hostile acts against the Communist state. North Korea had arrested Euna Lee and Laura Ling on March 17, accusing the pair of illegally crossing the China-North Korea border. The two reporters were working for San Francisco-based Current TV on a story on refugees fleeing hunger in North Korea. They would be the first Americans indicted and tried in North Korea. The charges carry a sentence of five to ten years in a labor-reeducation camp.

Unions claim that denying workers a private ballot when deciding whether to form a union constitutes “leveling the playing field” for workers. If that definition of a level playing field surprises you, then you aren’t familiar with union organizing tactics. Listen to Rian Wathen, former organizing director for United Food and Commercial Workers Local 700:

Europe’s agricultural subsidies and price supports—AKA the Common Agricultural Policy—cost the British £10.3 billion per year in higher taxes and food prices, according to a new report from the British Taxpayers’ Alliance. That works out to a cost of £398 per household. The BTA report argues:

As a major contributor to the EU budget, the UK’s hand is very strong, but has been underplayed. … As long as the CAP exists, the UK will continue to shoulder an unfair portion of the burden of supporting foreign taxpayers’ farmers. In itself, that discourages reform, and encourages obstructionism by an entrenched lobby of overseas farmers.

The EU needs to scrap the CAP, and hand back management to national governments. National governments should be made to understand that they can continue to pay their farmers subsidies, but that it must be out of their own tax revenue. Governments of other EU member states might then find their electorates take more of an interest in how their money is being spent. This change should be accompanied by the warning that the consequences for their own protectionism will fall on their own heads in future world trade talks. Alternatively, the money could be saved simply by leaving the EU.

The British Government needs to insist that the CAP is scrapped. Taking a strong stand like this may be controversial, but the price of meekness is up to ten billion pounds a year of British families’ money.

The BTA provides a humorous spin-off on the report’s findings in this video:

FYI: The “Jamie Oliveoil” moniker references a controversy from last year in which the British celebrity cook Jamie Oliver was accused of causing environmental degradation in Europe by increasing demand for olive oil.

• Secretary of Defense Bob Gates told Fox News on Sunday that the United States won’t shoot down the missile that North Korea plans to launch sometime between April 4 and April 8 unless the missile appears to be heading toward the United States: “I would say we’re not prepared to do anything about it. … If we had an aberrant missile, one that looked like it was headed for Hawaii, we might consider it, but I don’t think we have any plans to do anything like that at this point.”

• Japan has mobilized its anti-missile shield in case something goes wrong with the launch and Japan is threatened with debris. Japan has deployed Patriot missile interceptors around Tokyo and sent warships to the Sea of Japan

• A satellite photograph taken Sunday shows the missile that North Korea plans to launch, according to the Institute for Science and International Security.

ISIS says it obtained the photo from DigitalGlobe and that it shows the shadow of a rocket at the Musudan-ri launch site in northeastern North Korea.

• South Korean President Lee Myung-bak, in an interview published yesterday in the Financial Times, said:

… the Japanese are rightly concerned because this object will travel inevitably through their airspace and will have the possibility of falling into their territorial waters. … I don’t think it’s appropriate for us to say whether we support or reject it either way. What I do oppose is to militarily respond to these kind of actions because it is also not in their interest to test-fire anything. In the short-term it might be beneficial for negotiating conditions, but in the long –term it won’t be in their interest.

The South Korean President also rejected the notion that the planned launch reflected a souring in the inter-Korean relationship and ruled out for the time being taking a harder diplomatic line with North Korea. He described the idea of shutting down the inter-Korean industrial complex in Gaeseong, North Korea, as “an extreme measure that would not be helpful.”

• The Japanese newspaper Sankei Shimbun, quoting unidentified Japanese government sources, reports that North Korea is planning to conduct a separate shorter-range missile test shortly after the April 4 – April 8 test that it has announced.

Do we really believe it’s fair that when a married couple with a taxable income of $50,000 gives $1,000 to charity, they get a tax benefit of $150, while a couple earning $1 million making exactly the same contribution gets back $350? Is it fair that the higher-income couple also gets a bigger tax advantage on their mortgage payments? The value of the deductions is currently worth more to the higher-income couple because they pay taxes at a higher rate. [Emphasis added.]

That was famed liberal columnist E.J. Dionne, arguing that Obama should raise taxes on lots more people than he is already planning to raise taxes on. But according to Dionne’s logic, the unfairness of such deductions must increase as marginal tax rates increase. If the highest marginal tax rate was 90 percent instead of 35 percent, then the wealthy couple saves $900 compared to the $150 saved by the middle-income couple.

In this hypothetical, should a 90 percent marginal tax rate make the wealthier couple feel even more privileged than the 35 percent rate? We’d like to hear Dionne explain that one to a taxpayer who actually faces such a tax burden. Unfortunately, there’s a fair chance that Dionne could get that opportunity if he wanted it. The House of Representatives wants to stick a 90 percent marginal income tax rate on the AIG bonus getters. And at least one of those bonus getters has plans to donate his bonus to charities helping those impacted by the economic downturn. Resigning from AIG this week, Jake DeSantis wrote to AIG chief Edward Libby:

I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less — in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.

Meanwhile, the Senate today defeated a resolution that would have affirmed support for the charitable deduction, opening the way for implementing President Obama’s proposed cap on the deductions. As Mr. DeSantis exits his job over the bonus furor, liberals plan to get him and many others both coming and going.

As North Korea prepares to conduct a so-called “satellite test,” in which it is expected to launch a Taepodong-2 ballistic missile on a trajectory over Japan, you might be wondering: What can the United States do about ballistic missiles launched by rogue nations? Secretary of State Hillary Clinton has threatened additional sanctions if North Korea goes through with the launch, and the U.S. Navy has deployed warships equipped with the Aegis anti-missile systems in the waters off Japan.

The Obama administration, however, is reportedly thinking of making ballistic missile defenses less of a priority. A good way to learn more about the need to continue developing anti-ballistic missile technology is to attend a screening of The Heritage Foundation’s recent documentary, 33 Minutes. Here’s a trailer:

Yesterday, the Arizona supreme court ruled that two of the state’s school choice programs violate the state constitution’s prohibition against appropriating money for private schools. The programs had provided vouchers to the parents of special needs and foster children to attend the private school of their choice. The 470 children who had been participating in the program will be allowed to remain in their schools until the end of the school year. From the Institute for Justice, here’s a profile of one of the children who has benefitted from the program:

On Tuesday, Jake DeSantis resigned his position as an executive vice president at American International Group. DeSantis provided the reasons for his resignation in a letter to AIG chief executive Edward M. Libby. Here is the beginning of the letter:

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

Secretary of the Treasury Timothy Geithner is reported to be preparing to ask Congress to create a new role for the Treasury to act as a regulator of systemic risk. Under this plan, the department would have a permanent authority to take over large companies whose failures could threaten the entire financial system.

But wait—wasn’t the implicit promise of government backing the whole reason that Fannie Mae and Freddie Mac were able to pump up the market for the subprime and Alt-A loans that are now befouling their balance sheets as well as those of private banks that can’t lend now? Doesn’t designating some institutions as “too big to fail” encourage the sort of risk taking that we want to prevent in the future? Let’s review, with Peter Wallison of the American Enterprise Institute in a new Center for Freedom and Prosperity video:

Taxpayers should take note of the efforts of Colorado’s determined and clever political class, which passes up no opportunity to find ways around the state’s constitutional limitations on tax and spending increases. Just last week, the state supreme court ruled that Article X of the state constitution—also known as the Taxpayer’s Bill of Rights (TABOR)—is no bar to Governor Ritter’s plan to freeze mill rates. Mill rates had been scheduled to decline, so the change is in fact a tax increase, one that is expected to net the state an extra $117 million this year and even more in years to come. TABOR requires voter approval for “any new tax, tax rate increase, mill levy above that for the prior year … or a tax policy change directly causing a net tax revenue gain to any district.” The Colorado high court ruled that voters in 174 of the 178 districts had already given such approval years earlier when they approved waivers allowing the school districts to keep excess revenues. In May of 2008, a Colorado district court had stuck down the mill freeze, based partly on evidence presented by the plaintiffs that when school districts had asked for the waivers they had expressly told voters that a yes vote was not a vote for a mill increase. The Colorado supreme court took the position that the evidence was irrelevant. Richard Westfall, one of the attorneys who worked on the case for the plaintiffs, predicts that because of the ruling “TABOR challenges are going to be much tougher going forward.” (For a good discussion of the case, listen to John Caldara’s interview with Westfall.)

While freezing mill rates, the governor’s plan also decreases the state’s contributions to local school districts. In effect, the extra revenue being raised through the mill freeze is being used not for local education but for the pet projects of state legislators and for more welfare instead. Again, the court decision occurred last week, which, by the way, was Sunshine Week—an effort to recognize successes in making government more open and transparent to citizens. Colorado lawmakers missed the news.

The governor’s slight of hand calls to mind Referendum C, another TABOR reality check for Colorado taxpayers. Referendum C, approved by the voters in 2005, suspended TABOR limits for five years. Voters were sold on the idea with the promise that the new revenues would be split between K-12 education, higher education, and health care programs. A study by Colorado’s Independence Institute found that Referendum C resulted in an 11.9 percent increase in spending for health care and education, but a 28.7 percent increase for the rest of the budget. Since money is fungible, lawmakers could claim that Referendum C revenues were not used to fund those other increases.

Colorado taxpayers have additional budget legerdemain to look forward to. The governor has proposed $300 million in increases to fees and surcharges, which are not subject to TABOR limits. Lawmakers, meanwhile, are planning to loosen, through legislation, the TABOR limits on spending—even though TABOR is part of the state constitution. They want to be able to take advantage of the aid for states contained in the federal “stimulus” package.

More from the “people are a problem” chorus: “Jonathon Porritt, one of Gordon Brown’s leading green advisers,” reports the Times, “is to warn that Britain must drastically reduce its population if it is to build a sustainable society.” The story continues:

Porritt’s call will come at this week’s annual conference of the Optimum Population Trust (OPT), of which he is patron. The trust will release research suggesting UK population must be cut to 30m if the country wants to feed itself sustainably. Porritt said: “Population growth, plus economic growth, is putting the world under terrible pressure. Each person in Britain has far more impact on the environment than those in developing countries so cutting our population is one way to reduce that impact.” … Many experts believe that, since Europeans and Americans have such a lopsided impact on the environment, the world would benefit more from reducing their populations than by making cuts in developing countries. This is part of the thinking behind the OPT’s call for Britain to cut population to 30m — roughly what it was in late Victorian times. Britain’s population is expected to grow from 61m now to 71m by 2031.

Doom-and-gloom predictions have a dubious track record. Remember the Club of Rome and its The Limits to Growth? That book, published in 1972, predicted: “If present trends continue, the world in 2000 will be more crowded, more polluted, less stable ecologically, and more vulnerable to disruption than the world we live in now. Serious stresses involving population, resources, and environment are clearly visible ahead.”

For a detailed demonstration of just how wrong those neo-Malthusian predictions of scarcity and environmental degradation turned out to be, see Indur Goklany’s The Improving State of the World. Here are just a few points pulled from Goklany’s book (internal citations omitted from quoted material):

• “Since 1950, the global population has increased by more than 150 percent, and [per capita incomes] by more than 190 percent. Both those factors increase the demand for food. Yet the real price of food commodities has declined 75 percent. … [A]verage daily food supplies per capita … increased 24 percent globally from 1961 to 2002. The increase for developing countries, at 38 percent, was even larger.”

• Infant mortality worldwide declined from 93 per 1,000 live-births in 1970-75 to 57 in 2003.

• “Access to safe water in low-income countries is estimated to have increased from 19.6 percent in 1975 to 69.3 percent in 1993. By 2002, 76 percent of the population of low-income countries had access to improved water sources.”

• “[N]umerous controlled field experiments show that increasing atmospheric CO2 concentrations increase crop yields. The 1995 impact assessment by the Intergovernmental Panel on Climate Change (IPCC) suggests that yields of C3 crops (i.e., the majority of crops) may increase on average of 30 percent due to a doubling of CO2. Sylvan Wittwer, the eminent agronomist, estimates that the increase in CO2 concentrations during the past two centuries may have increased production by as much as 14 percent.”

• “An analysis of satellite data on vegetation cover indicates that the earth’s net primary productivity increased by 6 percent from 1982 to 1999. The Amazon rain forests accounted for 42 percent of that increase, mainly because of decreasing cloud cover, which increased solar radiation.”

Today, global warming is the twist that supposedly gives the “limits” story new validation. But before people sign over to the government their right to decide how big their families will be, they should keep in mind how little will be accomplished by limiting carbon emissions. It has been estimated, for example, that full compliance with the Kyoto Protocol would have reduced global temperatures by only 0.07 degrees Celsius by 2050.

In international affairs, Vladimir Putin might be good at leveraging government control of the energy sector into political power, but his crony capitalism isn’t delivering the goods at home. American Enterprise Institute scholar Leon Aron paints a bleak picture of Russian agriculture:

Helped by very propitious weather, the steady progress of the “capitalists” and the “agribusinesses” combined to make Russia’s 2008 grain harvest of 113 million tons the largest in post-Soviet history and the first one to exceed the 1992 yield of 107 million tons.

Outside of grain, however, Russian agriculture cannot compete with the ultra-efficient, mechanized, computerized, and heavily state-subsidized European and U.S. private farms in either quality or quantity. The gap is especially dramatic in animal husbandry, in which Russia is still behind its 1992 production levels of meat and poultry (by 33 percent), milk (32 percent), and eggs (12 percent). …

In early 2007, 45 percent of all food consumed in Russia was imported (compared to 20 percent in 2004), including 30 percent of meat (beef and pork) and nearly 40 percent of poultry. … In larger cities, according to Putin, 70-85 percent of food for sale came from abroad. …

Such reliance on foreign food is most unusual for a country of Russia’s per-capita GDP and, even more so, its land area, which encompasses 9 percent of the world’s arable acreage, 40 percent of which is exceptionally fertile “black earth.” … [F]ood imports have continued to soar: in January-June 2008, those of meat and poultry grew year-on-year by 44 percent and of milk by 21 percent; sugar and vegetable oil were 2.8 times and 1.9 times higher, respectively. …

The effects of the centralization and interpenetration of political power and private property, so characteristic of Putin’s presidency, have been no less conspicuous in agricultural production than they have been, for instance, in oil production, car-making, or aeronautics. The outcomes have been similar as well: the already mentioned, and growing, monopolization of wholesale trade, food processing, farm services, and equipment leasing; the erosion or elimination of competition; unfairly low purchasing prices for the farmers; and price fixing and collusion between buyers and distributors of food.

As folks assess the Russian bear, they need to keep in mind both the strengths and the weaknesses afforded by the heavy hand of the Russian state.

“Despite some episodes of backsliding,” says Cato scholar Dan Ikenson, “the world is unlikely to witness a significant departure from the trend toward trade and investment liberalization that has been evident since the end of World War II.”

It would be easy to think otherwise. With the world economy projected to contract for the first time in 60 years, some think it a foregone conclusion that trade politics will return to those of the 1929-1934 period when world trade collapsed by two-thirds. Fearing such a possibility back in November, the leaders of the G-20 nations pledged to avoid taking new protectionism measures. But just this week, a World Bank study found that 17 of those countries have implemented 47 protectionist measures since their leaders took that pledge. Other reporting of protectionist sentiments and measures abounds. The “stimulus” bill included a provision scrapping a pilot program that had allowed Mexican trucks to deliver goods “door-to-door” to U.S. recipients rather than unloading within 25 miles of the border for reshipment on U.S. trucks. Mexico, regarding the move as a violation of U.S. commitments under the North American Free Trade Agreement, responded this week by placing tariffs on $2.4 billion worth of U.S. imports. Even Secretary of the Treasury Timothy Geithner had seemed to flirt with a trade war at his confirmation hearings when he accused China of manipulating its currency for trade advantage.

But Ikenson makes a good case that the fears are overblown. First of all, he points out, rising fears of protectionism are not evidence of rising protectionism. And neither are isolated cases of new protectionist policies. Rising tariffs, says Ikenson, are not so rare as to indicate a crisis of the world trading system. World Trade Organization rules actually give countries some latitude to raise barriers. Developing countries have more latitude than developed countries. The system was designed that way—so that it could bend but not break when political stresses occur. One could view that fact as a point against the WTO, but in 1929 there was no rules-based trading system at all. The General Agreement on Tariffs and Trade, followed by the World Trade Organization, was created precisely for the purpose of containing the protectionist impulses that can arise during an economic downturn. Today, if all WTO members raised their tariffs to the maximum allowed under WTO rules, then the value of global trade would decline by 7.7 percent over five years. That would be significant, but nothing like the 66 percent decline in world trade that occurred between 1929 and 1934.

Further, says Ikenson, most countries today see trade openness as beneficial for their economies. And the rise of transnational supply chains, cross-border direct investment, multinational joint ventures, and equity tie-ups makes it harder for countries to use trade policy as a weapon against other countries without hurting themselves, too. Ikenson notes that “55 percent of U.S. import value in 2007 was of intermediate goods, which indicates that U.S. producers depend highly on imported materials, components, and capital equipment.”

Despite his optimism, Ikenson says there is one thing we should be worried about: Reporters who don’t provide the appropriate context for understanding developments in trade policy: “If a Congressman’s aide can point to articles that cite rising protectionism, even if the measures cited don’t justify the label of protectionism, it becomes less taboo to propose or support protectionist policies.”

President Obama’s recent order on embryonic stem cells reveals a disturbing inconsistency, argues Steve Chapman at Reason. The President recently lifted a rule that President Bush had put into place prohibiting federal funding for research using embryonic stem cell lines created after August 2001. Chapman writes that Obama

… left open the possibility of funding studies using embryos created specifically so their cells can be harvested—which Congress has barred, but which some advocates would like to allow. The president took no position on whether scientists should be permitted to create embryos for the sole purpose of dismembering them for their stem cells.

He did, however, reject another option. “We will ensure,” he said, “that our government never opens the door to the use of cloning for human reproduction. It is dangerous, profoundly wrong and has no place in our society, or any society.”

What this mandate means is simple: It may be permissible for scientists to create cloned embryos and kill them. It’s not permissible to create cloned embryos and let them live. Their cells may be used for our benefit, but not for their own.

There lies the reality of embryonic stem cell research: It turns incipient human beings into commodities to be exploited for the sake of people who are safely past that defenseless stage of their lives.

A problem with the Employee Free Choice Act, aside from doing away with secret-ballot elections for union organizing, is that it contains little in the way of checks on the organizing tactics that unions may use. The act allows a union to be formed when more than half of employees sign union authorization cards. In the video below, from a Heritage event last month, Rian Wathen describes how unions will manipulate workers into signing these cards. Wathen should know. He is a former organizing director for UFCW Local 700.

If you think government needs to take over the banks, ask yourself this: Do you want your ability to get a loan to start a business to depend on who you know?

The Royal Bank of Scotland, recently taken over by the British government, appears to have made asking potential customers about their political affiliations a routine part of its operations. Spectator columnist Fraser Nelson looked into one such claim from a man who had asked RBS about getting a credit-card processing facility for his family’s business. When Nelson posed as a customer desiring the same service, he also was asked about his political affiliations. The bank representative explained the reason for the question: “I presume we ask because there is a high volume of fraud in that sector. Because people who are of that sort of [party political] nature, maybe, are inclined to commit fraud.”

Nelson reports that the British government denies it has required banks to ask such questions. Still, Fraser observes, it does send chills, especially when considering how politically useful bank control has been to Gordon Brown’s government:

Banks … have been ordered to protect jobs in politically sensitive parts of the country (HBOS) or overcharge customers in order to repay the government loan (Northern Rock). And crucially, the nation’s savings can now be used to prop up the government simply by obliging banks to buy UK government debt. This is what is even more worryingly Stalinist than impertinent questions about politics.

Where once British banks scoured the planet to find the best investments, they have now become mysteriously converted to the case for UK government gilts — becoming net buyers last month for the first time in a decade. Foreign buyers, meanwhile, have all piled out — which would have triggered a funding crisis if so many British banks had not been suddenly filled with the patriotic spirit.

As big as President Obama’s fiscal year 2010 budget is, it likely contains more spending and larger deficits than advertised.

The Numbers

The plan calls for spending $3.55 trillion in 2010, and charts a path to spending $5.16 trillion in 2019. Obama’s budget projects government taking a larger bite out of the national economy over the next 10 years. The surge in spending from various bailouts and the “stimulus” bill has already taken federal spending from 21 percent of gross domestic product in 2008 to a projected 27.7 percent in 2009. In spite of assuming robust economic growth, Obama’s plan calls for maintaining spending at 24.1 percent of GDP in 2010. Over the next 10 years, federal spending would amount to 22.5 percent of gross domestic product. Heritage’s Brian Riedl notes that there have been only three times since World War II that federal spending’s share of the economy has exceeded this level.

The deficit, again because of the bailout/stimulus spending, skyrocketed from $459 billion to $1.7 trillion (12.3 percent of GDP) in 2009. Obama’s budget projects a 2010 deficit of $1.2 trillion and at no time in the next 10 years does the deficit drop below $533 billion. In 2008, debt held by the public as a percent of GDP was 40.8 percent, and it jumped to 58.7 percent in 2009. Obama’s budget produces a further boost to 64.1 percent of GDP in 2010 and brings that figure to 67.2 percent by 2019. That would constitute, says Riedl, the highest debt burden that the United States has experienced since immediately after World War II.

The Tricks

According to various budget analysts, however, these figures likely understate both the extent of spending and the size of the deficits. Further, the analysts point out, the administration uses various accounting gimmicks to be able to paint its budget as more fiscally conservative than it really is.

Too Optimistic on Growth. In calculating revenue projections, the administration assumes faster economic growth than other credible experts. The Obama budget projects a reduction of only 1 percent in the economy this year, followed by 3.2 percent growth next year. Both the Congressional Budget Office and the Blue Chip Consensus (a compilation of about 50 different economic forecasts) foresee a contraction of 2 percent this year and growth of 1.5 percent to 2.0 percent in 2010. The administration also assumes 4.6 percent growth in 2012, but the Blue Chip Consensus projects only 2.9 percent growth. Riedl calculates that if CBO and the Blue Chip Consensus are correct, then federal deficits will be bigger by about $100 billion annually than projected by the Obama budget.

Both Riedl and Veronique de Rugy of the MercatusCenter also point out that the President’s tax proposals, if enacted, are likely to reduce economic growth, and thus reduce tax revenue even further from Obama’s assumptions. Those proposals include raising the top two marginal income tax rates from 33 percent and 35 percent to 36 percent and 39.6 percent, raising both the capital-gains tax and the dividend tax from 15 percent to 20 percent, and reinstating superfund taxes. Obama also plans to fight global warming with a cap-and-trade system that will make energy more expensive for American consumers. Those higher taxes can all be expected to hurt economic growth.

But, asks de Rugy,“if the president is right about this relatively robust growth in 2010, how can he justify spending the bulk of his stimulus funds after the economy would have already recovered? After all, by his own count, 75 percent of stimulus funds won’t be released until 2010.”

Hidden Spending. Other problems include unrealistic assumptions about the expiration of stimulus spending that Congress just passed (will, for instance, states need additional bailouts two years from now?); the cost of Obama’s health care plans ($640 million budgeted for the next 10 years but many think the health care proposals will cost more than that); and the situation in Afghanistan (no additional funding assumed in spite of plans to increase the U.S. presence there).

Fake Deficit Reduction. Taking the numbers at face value, Obama’s budget does cut the deficit in half by 2013. On further inspection, this accomplishment turns out to be not so impressive. In 2013, the halved deficit will stand at $533 billion; but it was only $459 billion in 2008! The 2013 deficit will indeed by less than half of the $1.2 trillion deficit of 2010. Halving something turns out to be easier to do after you have doubled it first! And while there are no such things as facts about future budgets, the Obama budget also projects increasing deficits beyond 2013. The deficit reaches $712 billion by 2019.

A further problem here, as both Riedl and de Rugy point out, is that the administration’s deficit reduction “accomplishment” is hardly one of finding savings in the budget. A good chunk of the deficit reduction is achieved through $1.4 trillion worth of tax increases over the 10-year period. The administration also incorporates spending on the Iraq war into the budget baseline, so that it can claim it is achieving savings by withdrawing troops. But even the Bush administration had projected that troops would be withdrawn by 2012.

PAYGO? One last trick, noted by Riedl, is that the administration has called for bringing back Congress’s PAYGO rule, under which any policy changes that trigger an increase in the budget deficit would trigger an across-the-board reduction in entitlement spending. Is this a sign that Obama is a serious about holding the line on new spending? Hardly. Congress has routinely waived PAYGO rules when it had them in place, and would certainly do so again, as the President’s own budget contains $3.4 trillion worth of PAYGO violations over the 10-year period.

President Obama’s plans for fighting global warming would require low-income earners to sacrifice proportionately more than those with higher incomes. Obama’s 2010 budget includes a proposal to create a cap-and trade-system on greenhouse gas emissions. A new report from the Tax Foundation provides some details about how such a plan would apportion the burdens. As the report notes, all tax burdens ultimately fall on people, and even though politicians like to think of cap-and-trade as the tax-free way of limiting greenhouse gas emissions—as opposed to the more transparent proposed carbon tax—it just isn’t so. A limit on carbon emissions is a constraint on supply that produces price increases for consumers. And, as with an excise tax, the burden of this hidden tax will fall disproportionately on lower-income earners since they spend a larger portion of their incomes on carbon-intensive products, such as fuel and electricity. According to the Tax Foundation, the bottom 20 percent of earners will have 6.2 percent of their before-tax incomes eaten up by the hidden tax on carbon, but for all consumers, the figure is a mere 2 percent. The top 20 percent of earners will pay only an extra 1.4 percent of their before-tax incomes on the hidden carbon tax.

Obama, remember, promised no tax increases for anybody making less than $250,000 per year. As with Obama’s earlier support for higher cigarette taxes to fund more government health care, this policy represents a breaking of his promise.

One great thing about a federal system of government is that it provides an additional feedback mechanism for politicians to judge the effectiveness of policies. Sure, politicians should pay attention to the ballot box, but they should also pay attention to how citizens vote with their feet. “Rich States, Poor States” is a brand new report from the American Legislative Exchange Council and it observes that for the past four decades, Americans have been leaving the states of the Northeast and the Midwest for those in the South and the Mountain West. This trend is especially pronounced among the Northeast states, where government is one-fifth more expensive than the national average. The ALEC report notes:

… an average-income family of four … saves $4,000 a year by moving [from a Northeast state] to just an average tax state and more like $6,000 a year by moving to Florida. … Labor costs are about 30 percent above the national average in this region. … Of the 22 right-to-work states, a grand total of zero are in the Northeast.

The long-term results of such high-tax, anti-free enterprise policies:

In 2007, the Northeast was home to a smaller share of the U.S. population than ever before; … it had a smaller industrial base and produced a smaller percentage of America’s total value added than at any time in the nation’s history.

The trend is further reflected in the changing distribution of power in Congress:

In the 1950s, the Northeastern states had 141 House seats. … Now they are down to 92. They will lose four or five more seats after 2010. … Between 1970 and 2030, [according to Census projections] the Northeast will have lost about one-third of its political power and relevance. New York and Pennsylvania will have lost 40 percent of their congressional seats.

As the report notes, states that want to pursue statist policies do not have their own version of a Berlin Wall to prevent people from leaving. They do, however, have something almost as powerful. They’ve got a Congress that’s willing to undermine this important feedback (i.e., accountability) mechanism by handing out $200 billion plus in bailout money to the states. States that get bailed out by the feds have less of a need to face the failures of their own policies. Could the declining fortunes of states governed by liberal policies also explain the desire of the White House to exercise greater control over the conduct of the next Census?

For further confirmation that state policies matter, see the report’s ranking of the states based on the ALEC-Laffer State Economic Competitiveness Index. (Arthur Laffer is one of the co-authors.) The ranking measures the burden of government on the private economy and is based largely on tax burdens and labor market restrictions. Not too surprisingly, the top ten ranking states had better than average economic growth, income growth, income per capita growth, and population growth over the past decade.

Yesterday, President Obama said he was outraged that employees at AIG had received $165 million in bonuses this year, despite the fact that AIG had received a $173 billion bailout courtesy of the taxpayers. Attributing AIG’s financial distress to recklessness and greed, the President said he had instructed Secretary of the Treasury Timothy Geithner to explore steps to make the taxpayers whole. But that might not be possible, because AIG says it is contractually obligated to provide the bonuses.

Note to Geithner: Going forward, an easy way to avoid rewarding reckless and greedy executives of financial services firms would be to avoid giving them $173 billion of the taxpayers’ money.

Should Americans envy the Canadians or the British or the Europeans for their health care systems? According to data from the Organisation for Economic Cooperation and Development, the United States spends more than double per capita on health care what the median OECD member spends. Meanwhile, life expectancy in the United States is similar to that in other developed countries, and U.S. infant mortality is among the highest of the developed countries. Advocates point to these facts to make their case for following either the Canadian model, where the government picks up the tab for all health insurance, or the British system in which almost all doctors are part of the National Health Service. But those data are nowhere near the whole story, say John Goodman, Linda Gorman, Devon Herrick, and Robert Sade. Goodman et al. conducted an extensive review of research comparing health care systems across countries, and they found quite a few facts that are contrary to the picture of an inefficient and ineffective U.S. system.

For instance, when you measure the cost of the U.S. system in terms of actual resources used, rather than financial expense, it turns out that the United States is more efficient than the average European country. Per capita, the United States uses fewer physicians, fewer nurses, fewer hospital beds, fewer physician visits, and fewer hospital stays than the average OECD country. This discrepancy, say the authors, is a result of both inconsistent accounting methods used across countries and the fact that real prices are hard to identify when market forces are actively suppressed as they are in many European countries. Further, the United States has also bested the OECD on controlling health care cost growth: 3.7 percent annually over the past decade compared to 3.8 percent annually for the OECD; and 4.4 percent annually over the past four decades compared to 4.5 percent annually for the OECD.

Another problem, say the authors of the review, is that comparisons of health care costs usually ignore the cost of waiting for health care, which can be quite substantial in countries where waiting times are made longer because prices are held artificially low. For instance, in 2002-2004, dialysis patients waited 16 days for permanent blood vessel access in the United States, 20 days in Europe, and 62 days in Canada. More time waiting for care means less time available for healthy workers to contribute to the economy.

A further point in favor of U.S. health care is that for their money U.S. patients receive much better treatment for cancer. In the United States, women have a 63 percent chance of living at least five years after a cancer diagnosis, compared with 56 percent for European women. Men in the United States have a five-year survival rate of 66 percent, compared to only 47 percent for European men.

Another myth of universal health care, say the authors, is the idea that universal health care reduces inequality between the rich and the poor in terms of access to care. But studies of Britain’s National Health Service have found that inequality in access to care has actually increased since the founding of the NHS. Another study of OECD countries has found that among people with similar health conditions, “higher income people use the system more intensively and use more costly services than do lower income people.” Goodman and company offer this explanation: “It seems likely that the same personal characteristics that ensure success in a market economy also enhance success in bureaucratic systems.”

You may have heard about the global warming protest that recently took place in the middle of a snowstorm in Washington, D.C. It featured such winning chants as: “Food, not bombs. Plant a garden on the White House lawn.” This deathless prose aside, the real aim of the protest was to urge Congress to shut down the Capitol’s own coal-fired power plant.

Of course, any good protest is a tapestry of messages—some intended, some not intended. Professional protestors flew in on carbon dioxide-spewing jets from across the country and across the Atlantic. Some—like a guy who had “wage love” scrawled across his face—looked as if they had joined the civil disobedience road show during the Vietnam War and been at it ever since. Newer recruits were advised which color-coded protest unit to join, and, for those willing to be arrested, the number for the legal hotline that should be scrawled on a forearm. The sense of great excitement—danger—and of belonging to something among many starry-eyed youths was obvious. They had colorful banners and flags and eerie signs with artwork depicting a gas-masked figure that were reminiscent of the militant left’s anti-nuclear protests in 1980s. Some wore green hard hats, apparently unaware that the helmets were made with byproducts of petroleum (hey, isn’t that also a fossil fuel that releases carbon dioxide when you burn it?).

The pros however knew the event was really symbolic. Congress’ liberal leadership had already proclaimed that they would get rid of this “bad” coal-fired power plant. A Senate committee recently voted unanimous support for confirming a presidential science advisor who has opined that global warming could kill as many as 1 billion people by 2020. In spite of such dire warnings, Congress has not yet shut down its very own apocalypse-making, death-spewing, coal-burning power plant.

If one looked closely at this protest meant to expose the gap between idealism and action, however, one could find an alternative message about alternative energy. The professional protestors had brought along a specially modified truck so that warm beverages could be delivered to the troops. Unfortunately for the chilly chanters, the vehicle was solar powered, and the snowstorm had left its solar panels covered with snow. Alternative energy here had failed to deliver the goods. Yet the protest played on, hoping to compel the rest of us into a dimmer future.

A protest of another kindtook place a week later at the Heartland Institute’s conference exploring the question “Was global warming ever really a crisis?” While the conference goers didn’t have either rhyming or non-rhyming chants they did discuss meaty issues. Attendees discussed, for instance, research indicating that the fingerprint of catastrophic man-made warming is somehow missing in a zone of the atmosphere called the troposphere. It is not that the data necessary to demonstrate a fingerprint haven’t been collected. They have. The troposphere has been dusted so to speak with a zillion weather balloons. But, to the dismay of the true believers in a pending catastrophe, there’s little if any evidence in the way of a man-made hotspot. This fact is a problem for the claim that the science is settled.

Other problematic issues for the climate crisis camp were raised as well. Anthony Watts presented his painstaking research into the condition of the system of the 1,221 climate monitoring stations overseen by NOAA’s National Weather Service. Watts and his team actually inspected and photographed 860 of the stations and what they found was shocking. Eighty-nine percent of the stations failed to meet the Weather Service’s own standards designed to ensure that the readings would be collected in a uniform way and not be thrown off by being positioned on blistering rooftops or on heat radiating asphalt surfaces or by hot air from air conditioning exhaust fans. Watts reported that his research reveals errors in the weather stations’ readings to be greater than the asserted increase in temperature for the last century. (See photos of the sites including some infrared images at SurfaceStations.org.)

Nearby the Heartland conference, as at the D.C. protest, another attempt to employ alternative energy was taking place. Among the many glowing signs plastering Times Square, Ricoh had designed one to be powered by 16 wind turbines and 64 solar panels. The turbines are supposed to generate 90 percent of the power needed to light up the sign, while solar panels are supposed to generate the remaining 10 percent. Unfortunately for boosters of alternative energy, this opportunity to impress the Heartland conference goers fell by the wayside: Ricoh’s plans for installing the turbines are behind schedule, which left the sign to be illuminated only by the glow of the other, carbon-emitting, signs in Times Square.

Some people have suggested that the current crisis suggests that ‘free’ markets are dead. Given the high degree of regulatory scrutiny in the financial sector that is not a point of view I hold. However, the neo-classical case for the market economy has certainly become strained, though the Austrian or Hayekian case has been strengthened. Much of the new breed of regulation that appears to have failed has relied on institutions using highly quantitative models and lots of market information. Uniform accountancy standards have been implemented by law in much of the world, based on market values. Data-driven risk models based on patterns repeating themselves in financial markets in predictable ways were encouraged by regulation. These models were adopted widely throughout the world. So, what happens when they fail? The whole financial world – encouraged by regulation to take the same approach to risk management and capital setting – goes pop at the same time.

Markets, in fact, are a discovery process. It cannot be assumed that market prices are a perfect reflection of economic value at any particular time. Market participants continually discover new information, make errors and respond to errors. It is important that financial institutions are allowed to do things differently so that some (who use better and more efficient methods) succeed and others fail (indeed, it is important that institutions are allowed to fail). When we use data to take financial decisions, decide how much capital to keep and so on, we should be aware that the data we use contains some information but that relationships that hold one day will not hold precisely the next day. We should stand back and think conceptually about the risks that financial institutions are taking.

The crash gives many more indications that Hayek was right. Hayek argues that unregulated markets develop institutions that ensure that trust and reputation become valuable commodities. But who cares about trust and reputation when we believe that everything will be looked after by the regulators or by deposit insurance? As far as a company is concerned, compliance with regulation has become more important than trust. The market has been allowed to generate crude economic efficiency, but trust has been crowded out by regulation.

New media mavens will find James DeLong’s recent article at The American challenging. Boiling DeLong’s argument down: Bloggers and aggregators like Drudge are mere surfers on the sea of Associated Press content. But the rise of these Internet aggregators undermines the business model that had financed the news collection performed by the AP and the local newspapers. That model had emphasized advertising and classifieds. But if Internet users are heading straight for the blogs or skipping the news altogether to browse Craigslist, then how will news collection be financed in the future? No one has yet figured out a pay-for-content model that will work, and such a model is anathema to Internet newsies. DeLong concludes:

It is hard to hazard how this one will come out. News collection will not disappear, but given the odds against creating a property rights model in the current zeitgeist, it seems ominously likely that we are headed for a government-sponsored news service. Maybe we will like it. China is already expanding Xinhua to go worldwide, so we can call ours Xinhua East. It shouldn’t take more than a few days to clear any given story through the White House information czar.

Whatever one thinks of this prediction, DeLong’s observations are helpful. They remind us that markets are always discovering new business models. Bundling different products together can create efficiencies for which consumers are willing to pay. That’s what newspapers did by mixing hard news with opinion and sports and classifieds and comics and advertising. Newspapers were neither an all-you-can-eat buffet nor an a la carte tray. Readers paid one price for content selected by the editors. Now the Internet gives information consumers greater control over what content reaches their eyes, and consumers like this control.

Policymakers should always be careful about second-guessing consumer preferences, but they should also refrain from dictating business models. That’s especially true if the Internet’s all-you-can-eat buffet doesn’t allow sufficient remuneration for content creation. Figuring out how to make a profit from a product is what markets do. One sure way of interfering with this process of business-model discovery would be to impose network neutrality mandates. The idea of network neutrality is that consumers need to be protected from the big bad Internet Service Providers who want to favor some content over other content by charging differential prices. As DeLong’s article aptly points out, newspapers in their heyday were not just content producers. They controlled a distribution network that gave them significant competitive advantages in their local markets. And yet nobody thought it strange that the Cleveland Plain Dealer published editorials written by its staff writers, but not editorials written by staff writers at the Los Angeles Times. Nobody called for government rules requiring newspapers to open their pages to any and all purveyors of content. If the Internet’s all-you-can-eat buffet isn’t working, then by all means let ISPs start tinkering with different pricing models.

Organized labor’s interpretation of its long-term decline is that labor law does not make it sufficiently easy to organize a union—hence the need for “card check.” A more compelling explanation sets the rise and fall of unions in a broader economic context. Understanding that context is important for understanding what is at stake in the attempt by unions to resurrect their place in the American economy—not just for union workers, but for nonunion workers and consumers, too.

Prof. Barry Hirsch of TrinityUniversity argues that the union strength that developed through the 1950s was an outgrowth of the cartelization of the economy that occurred during the New Deal. When firms in an industry are able to organize in order to prevent price competition, then they are also able to pass higher labor costs on to consumers. That makes those industries fertile ground for unionization, which was in fact encouraged by the Roosevelt administration. Brink Lindsey picks up Hirsch’s argument in his excellent monograph “Paul Krugman’s Nostalgianomics: Economic Policies, Social Norms, and Income Inequality.” Discussing the subsequent fall of union density, Lindsey writes:

One contributing factor is the structural shift in overall employment away from industries in which unionization was historically most prevalent (in particular, manufacturing industries). However, such structural changes are not the main reason for falling union density. Between 1983 and 2002, union density fell from 16.5 percent to 8.6 percent. Yet according to TrinityUniversity economist Barry Hirsch, even if industrial structure had remained unchanged over this period, union density would still have fallen to 10.2 percent. Thus, some 80 percent of the decline in unionization was due to falling union density within industries. …

The major reason for the fall in unionized employment, according to Hirsch, “is that union strength developed through the 1950s was gradually eroded by increasingly competitive and dynamic markets.” As he elaborates:

To the extent that high union labor compensation is not offset by greater productivity or higher product prices, union gains can be thought of as a “tax” on firm profits. The competitiveness of the product market affects the ability of the unions to acquire gains for their members. When much of an industry is unionized, firms may prosper with higher union costs as long as their competitors face similar costs. When union companies face low-cost competitors, labor cost increases cannot be passed through to consumers. Factors that increase the competitiveness of product markets—increased international trade, product market deregulation, and the entry of low-cost competitors—make it more difficult for union companies to prosper…

Accordingly, the decline of private-sector unionism was indeed abetted by policy changes. The changes in question, however, were not specific shifts in labor policy, but rather the general reduction of trade barriers and elimination of price and entry controls. … unionized firms, saddled with above-market wages and restrictive work rules, found themselves at a critical disadvantage. …They shrank accordingly, and union rolls along with them.

The forces driving American prosperity—free trade and free market competition—are the forces undercutting union power. Card check won’t dismantle free trade or impose price controls on the economy, so it probably won’t reverse union decline. On the other hand, the card check bill—also known as the Employee Free Choice Act—is more than advertised. Heritage’s labor analyst James Sherk points out that section 3 of the bill creates a binding arbitration process that would be used if a company failed to agree with its union on a first contract. With binding arbitration, says Sherk, unions would be encouraged to make outrageous demands in the hope of a generous decision by the arbitrator. But union contracts cover more than just compensation. They include employment levels; changes in business operations; promotion procedures; work assignments; subcontracting; and closure, sale, or merger of the business. Effectively, this binding arbitration would put the government in charge of deciding how the business shall be run for a two-year period.

Government arbitrators are not experts in the businesses for which they will be making such decisions. What happens if arbitrators make decisions that make it hard for a company to compete with rival firms? The bill does say that an arbitrator’s decision can be amended by written consent of the parties. However, in our current bailout culture, it doesn’t take too much imagination to see how government-imposed constraints on company performance could lead to a demand for bailouts from the taxpayer—as much to protect the bureaucrats who made bad decisions as to protect the hampered firm.

Under the EU’s cap-and-trade system for limiting greenhouse gas emissions, companies can offset their emissions through the United Nation’s Clean Development Mechanism. From a recent paper by H. Sterling Burnett, here’s one example of how the CDM works:

… 30 percent of current carbon offset credits are paying for the capture and destruction of trifluoromethane (HFC-23), a greenhouse gascreated as a byproduct of manufacturing refrigerant gases. A molecule of HFC-23 has 11,700 times the heat-trapping potential of [carbon dioxide]. The carbon offset credits sold to reduce HFC-23 emissions from refrigerant plants in developing countries are currently twice as valuable as the refrigerants those plants produce. [Emphasis added.]

Researchers Michael W. Wara and David G. Victor estimate that HFC-23 emitters could receive as much as $7.15 billion from the sale of carbon offsets through the (CDM). By comparison, at a cost of less than $155.4 million, companies in developed countries could pay refrigerant plants directly to install technology to capture and destroy the emissions. However, companies have little incentive to invest directly in projects to reduce HFC-23 emissions because such investments are outside the CDM system, which requires that companies buy certified offsets from sellers in developing countries. Thus, any reductions that result from direct investment would not count against the emissions cuts required by Kyoto. Indeed, some analysts fear that the opposite effect may be occurring. Refrigerant producers could be increasing their HFC-23 output just to sell more carbon offsets to reduce the additional waste gas.

Supposedly, the economy is stuck because so many banks have impaired balance sheets and need to hoard capital. OK, but why aren’t new financial intermediaries springing up to capture market share at the expense of banks that made bad decisions? Well, who wants to compete with folks that have their very own pipeline to taxpayers’ wallets? But aside from that obvious point, there’s this episode, reported by Katherine Mangu-Ward at Reason:

Until recently, people looking to get a small loan had another option: Prosper, an online auction site that let individual lenders choose whom to loan money, leaving the two parties to negotiate terms between themselves. But threats from state and federal regulators have led Prosper to suspend its operations and left its future uncertain.

A borrower using Prosper would set a maximum interest rate he was willing to pay, and then a reverse Dutch auction would take place, with lenders competing on terms to win the right to make the loan. The site, which allows potential borrowers to create profiles, offered the kind of personal connection and individual vetting that might have prevented some of the outrageous loans that precipitated the mortgage crisis. [Emphasis added.]

In October, however, Prosper suspended all new loan proceedings and in late November, the Securities and Exchange Commission (SEC) issued a cease-and-desist order against the website. Fred Joseph, securities commissioner of Colorado and president of the North American Securities Administrators Association, said in a December statement that Prosper’s business involved issuing securities, “but since Prosper’s activity began in 2006 these securities were not properly registered.”

Since launching in February 2006, Prosper has administered $178 million in loans. The overall default rate is a relatively high 18.5 percent, but the returns on successfully completed loans are higher than those offered by competing investments. Prosper and other microlending sites, such as Lending Club, have long maintained that they are only clearinghouses and thus are not subject to SEC regulations aimed at companies that issue securities.

In early December, Prosper agreed to pay 20 states $1 million to settle the charge that it sold unregistered securities. The site is still in a state of suspended animation, shutting down one more slice of the already constricted credit market.

The Securities and Exchange Commission, remember, is the outfit that couldn’t prevent a $50 billion pyramid scheme.

Unions claim that the Employee Free Choice Act is needed to counter unfair labor practices by businesses and reverse a long-term decline in union membership. The bill takes away an employees’ right to a private ballot in union certification elections and allows the certification of a union when organizers collect enough signatures from employees (50 percent plus one). Supporters contend that this process, known as “card check,” is needed to prevent businesses from intimidating employees. Leaving aside the fact that it is a secret ballot that protects employees from intimidation, data from the National Labor Relations Board do not support the union interpretation of their own misfortunes. In the past eight years, unions have won 56.8 percent of union certification elections—and the rate has actually gone up over that period! Richard Epstein calculates that if labor unions had won 100 percent of the certification elections and had prevailed also in 100 percent of the union decertification elections over that time, then an additional 668,235 private sector workers would be represented by a union today. Those additions would bring the number of private-sector workers represented by a union to 8.89 million for a unionization rate of 8.2 percent.

But unions represented 9 percent of the private-sector workforce in 2000! In other words, even the most wildly optimistic (for the unions) scenario shows that unions would have continued to decline with a card check procedure in place. The source of union decline, points out Epstein, is not declining success in certification elections but fewer certification elections being held, which reflects little more than a falling demand for union representation.

Maybe workers have been wising up to the fact, as we noted in our previous post, that unions are bad for employment, especially so in the industries and companies that get unionized.

Congress will soon consider a bill that will make it easier for unions to prevail in union organizing elections, even though studies show that unionization comes at a cost to the economy as a whole. Unions exist in order to exercise a form of cartel power to force companies to pay higher wages. Companies pass on those higher labor costs to consumers by raising prices, and consumers respond by buying less of the products made by companies with union workers. Unable to sell as much of their product, those companies have less need to hire workers. Further, when labor becomes more expensive relative to other inputs like capital and land, companies tend to save on labor costs by investing more in machinery, which further suppresses employment. A study by Robert LaLonde and Kenneth Troske found, for instance, that American manufacturers cut jobs by 11 percent two years after having their workplaces organized by unions. Other studies have found that unionized companies have annual job growth that is between 3 percent and 4 percent less than that of non-union companies.

Tomorrow in the Senate, a bill will be introduced that will do away with secret ballot elections for workers deciding whether to organize a union. Some suggest that this bill—the so-called Employee Free Choice Act or “card check” bill—would increase the rates of private-sector unionization by between 5 percentage points and 10 percentage points. Such an increase, estimates economist Anne Layne-Farrar, would increase unemployment by between 2.3 million and 5.4 million next year, which corresponds to an increase in the unemployment rate of between 1.5 percentage points and 3.5 percentage points. Analysts at the Heritage Foundation provide a more conservative estimate of 765,000 potential jobs lost in the next two years.

On Friday, the Department of Labor reported that the February unemployment rate reached 8.1 percent, the highest rate in over 25 years.

HillsdaleCollege has recently launched what looks to be an interesting lecture series in the Washington, D.C., area: First Principles on First Fridays. As you might guess, the lectures take place on the first Friday of every month. Early birds especially will love this program, as the events begin at 7:30 a.m. The April 3 event features Stephen Hayward talking about environmentalism and the Constitution. That lecture will be at the U.S. Capitol Visitor Center, room SVC 201/200. (The entrance is located on the east front of the U.S. Capitol at First Street and East Capitol Street, NE.)

Walter Williams chronicles what happens when government becomes the primary provider/financer of health care, as has happened in Britain, Canada, and Sweden:

The head of the World Health Organization calculated that Britain has as many as 25,000 unnecessary cancer deaths a year because of under-provision of care. … Toronto-area hospitals, concerned about lawsuits, ask patients to sign a legal release accepting that while delays in treatment may jeopardize their health, they nevertheless hold the hospital blameless. … the Canadian government spends over $1 billion each year for Canadians to receive medical treatment in [the United States]. … Malmo, with its 280,000 residents, is Sweden’s third-largest city. To see a physician, a patient must go to one of two local clinics before they can see a specialist. The clinics have security guards to keep patients from getting unruly as they wait hours to see a doctor. The guards also prevent new patients from entering the clinic when the waiting room is considered full.

Yesterday, President Obama held a summit to discuss ideas for reforming U.S. health care, but did not invite a single expert with a free market perspective on health care. The White House can fix this deficit of learning by tuning in on Monday to an event hosted by the Galen Institute and the International Policy Network called Lessons from Abroad for Health Reform in the U.S. And since the event will be available as a Web cast, the White House will have no excuses for missing it.

The National Committee for Responsive Philanthropy this week launched a new effort to undermine private philanthropy when it released its report “Criteria for Philanthropy at Its Best.” Ostensibly, the report urges grant making institutions to do a better job of giving to minority communities and representing minorities on their boards. The report echoes the efforts of the Greenlining Institute last year to establish benchmarks in California law for charitable organizations to serve minority communities.

Naomi Schaefer Riley, writing in the Wall Street Journal, does a good job of identifying what’s really going on here: The folks at NCRP and the Greenlining Institute want grant making institutions to become instruments of social change—with social change understood to be what they and other community organizing activists want, rather than what donors want. Riley writes:

What about the foundations founded to save whales or cure heart disease? Do they need to contribute to a participatory democracy? And who decides if a foundation is giving to a “marginalized” community anyway? The idea, put forward in the report, that giving grants to “large cultural or educational institutions” doesn’t benefit minorities is offensive. Black people don’t go to museums? Hispanics don’t go to college?

Looking at the recipients of some grants doesn’t tell you anything about who the real beneficiaries are. The Thomas B. Fordham Foundation is devoted to reforming K-12 education. It gives plenty of grants to white men studying schools. But if these grants lead to real reforms, presumably the biggest winners will be racial minorities, who are most at the mercy of bad public education. Eric Osberg, vice president of Fordham, finds the idea behind the NCRP report “worrisome.” He says, “We see ourselves serving all communities by advocating more school choice, higher standards and better teachers in the classroom.”

The real agenda behind NCRP’s report is revealed by the recommendation that at least 25 percent of grant dollars be used for “advocacy, organizing and civic engagement to promote equity, opportunity and justice in our society.” In other words, they want private charities to donate more money to left wing activism. But, as Riley points out, pressuring all grant-making institutions to fit into the mold of NCRP’s diversity recommendations would make the world of philanthropy into a monolith. “[F]oundations are not legislatures, and their purpose isn’t to reflect the preferences of society as a whole. … What makes Americans give billions each year is not pressure from activists or government mandates. It is a diversity of interests, freely chosen and passionately pursued.”

With a few exceptions, most state governors welcome the $200 billion plus that the U.S. Congress has recently bestowed upon them to help fill large gaps in their states’ budgets. These governors would have the taxpayers in their states believe that without the federal money they would be forced to either raise taxes to unacceptable levels or cut spending on vital services.

But, on the spending side of the equation, are states really without options?

1. Use Competitive Bidding for Prisons. Harnessing the profit motive to save money on prisons figures prominently in the budget recommendations of all three organizations. Evergreen recommends that Washington use private contracting for the construction though not the management of prisons. Pennsylvania already uses private contracting in prison construction, and Commonwealth urges the state to extend that to the management of the prisons, too. Michigan, says Jack McHugh, has done little in this area, even though many states have already achieved enormous savings from competitive contracting for prisons. The Reason Foundation, notes McHugh, has compiled the results of 28 different studies comparing prisons run by private contractors with state-run prisons. Reason found that virtually all the studies concluded that private prisons save money, usually between 5 and 15 percent. Reason has also reviewed 18 studies of prison quality. Sixteen of those studies found that privately-managed prisons perform at least as well as government-run prisons.

2. Get Out of Liquor Retailing. Evergreen says letting private retailers sell liquor instead of state-run liquor stores would save Washington taxpayers $120 million per year, while still allowing the state to collect liquor taxes. Commonwealth also urges shutting down Pennsylvania’s state-run stores, as well as contracting out the functions of the Liquor Control Board, a step that could bring the state a one-time cash infusion of $1.7 billion.

3. Cut Corporate Welfare. Michigan, Pennsylvania, and Washington all engage in various forms picking winners and losers in the economic marketplace. Michigan has its Michigan Economic Growth Authority (MEGA), which awards tax credits in exchange for agreements to create jobs. Pennsylvania has its Opportunity Grant Program which does the same thing, but calls it (more honestly) spending instead of tax credits. A 2005 study by the MackinacCenter found MEGA resulted in a shift toward employment in construction (hmmm!) (at a cost of $123,000 per job shifted) but no net economic gain for counties that hosted firms receiving MEGA grants. Commonwealth notes an audit of Pennsylvania’s Opportunity Grant Program found that the program produced less than 60 percent of the jobs advertised. GE and Amazon.com are among the corporations that have received taxpayer largess through the program.

The groups identified other notable opportunities for cutting corporate welfare, include eliminating subsidies for Hollywood to make films in their states (Mich.: $148 million in 2008; Pa.: $75 million per year; Wash.: $460,000 per year); cutting grants for promoting tourism (Pa.: $26 million in 2008-2009; Wash.: $13.6 million in the current budget); and ending taxpayer funding for museums and state historical societies, which can and should be funded through private philanthropy (Pa.: $3 million per year; Wash.: $8 million per year.)

4. ReformState Employee Pensions and Benefits. While the private-sector is moving to a “defined contribution” set-up for pensions and benefits, many state governments, including Michigan, Pennsylvania, and Washington maintain a “defined benefit” system. In practice, a defined-benefits system for state employees means the employees benefit from any upside in returns to pension funds, but taxpayers bear the risk on the downside. Commonwealth notes: “Following favorable investment returns in the 1990s, the costs to taxpayers to fund retirement benefits were lowered significantly. But rather than maintaining these low costs to taxpayers, policymakers decided to increase pension benefits for employees by tapping the ‘surplus.’ Today, Pennsylvania’s Public School Employees Retirement System (PSERS) and the State Employees Retirement System (SERS) are facing losses of 30-40 percent for the 2008 calendar year.” Commonwealth recommends that Pennsylvania shift to a 401(k)-type retirement plan for new state hires. Evergreen recommends the same for Washington, noting that the state already has $7.4 billion worth of future obligations to state employees on it books. That figure, says Evergreen, could grow to $12 billion in the next 25 years. The Mackinac Center, meanwhile, recommends Health Savings Accounts instead of traditional health insurance for state employees. As with “defined contribution” pensions plans, an HSA plan provides employees with an annual contribution to a tax preferred account. The accounts are coupled with a high-deductible health insurance plan, and employees pay their out-of-pocket costs from the HSA account. Mackinac estimates that if the state pays 100 percent of the premiums for the high-deductible plans and make the maximum contribution allowable to HSA accounts for state employees, the state would still save $16.2 billion per year from the shift.

5. End Prevailing Wage Laws. Michigan, Pennsylvania, and Washington all have prevailing wage laws, which require paying higher wages for public construction projects than if competitive wages were paid. Prevailing wage laws are a form of protectionism for unions. Commonwealth says eliminating Pennsylvania’s prevailing wage laws could save taxpayers 10 percent to 30 percent on labor costs for constructions projects, while the Mackinac Center says the same move would save Michigan taxpayers 40 percent to 60 percent on labor for construction projects. Evergreen also recommends Washington state do away with its prevailing wage law, which has been around since 1945.

These are just some of the many spending ideas out there for states facing huge budget gaps. The point to understand is that many of these reforms ought to be enacted, even if states did not have budget deficits to address. Bailing the states out with more federal money just removes an incentive for the states to do the right thing by eliminating wasteful spending.

The state of Washington recently mailed $1 checks to 250,000 food stamp recipients. No, the state didn’t really think an additional $1 was going to prevent somebody going to bed hungry. Rather, the state sent the money out in order to trigger an additional $43 million in assistance from the federal government.

As outrageous as this story is, it’s important to understand that the locus of the problem is Washington, D.C., not Olympia. As we’ve noted previously, federal aid to the states can be a trap that makes it difficult for states to write their budgets in a responsible way. In order to find a dollar of savings in programs funded by federal matching grants, states often have to give up two or three dollars in federal assistance. That math is daunting even for state lawmakers with fiscally conservative impulses. The only way out of the trap is for the U.S. Congress to see how damaging these incentives are and put an end to the whole matching-grant set-up. Unfortunately, Congress has moved in exactly the wrong direction: The stimulus package it passed undid the 1996 welfare reform by turning it again into a matching-grant program that rewards a state for having additional people on its welfare rolls.

Opponents of school choice have been repeating what we think to be a strange argument. The Los Angeles Times provides an instance of such argument. Reporting that the House Omnibus spending bill puts new obstacles in the way of funding for the DC Opportunity Scholarships program, the Times’ Karin Klein asserts:

Despite the moans, largely from Republicans, about how unfair this is to poor children, research has found little benefit to students from the D.C. voucher program. If accountability counts, it probably deserves to disappear, especially since Michelle Rhee, the dynamic chancellor of the D.C. public schools, gives every sign that she will reinvigorate the district.

Klein is imprecise in describing what research has found. One might think that providing “little benefit to students” means that the kids went through the whole school year and learned nary a thing. But that’s not what the research she cites shows. Instead, what researchers did was compare the outcomes at the choice schools to the outcomes at the traditional public schools. While it is true that the researchers found statistically insignificant differences between the two groups, it is worth noting that the differences were nevertheless positive for students in the voucher program: Their academic achievement was slightly higher than students who did not receive a voucher.

But even if it is true that the two types of schools perform equally well, why does one type of school deserve to be eliminated and the other preserved? Shouldn’t accountability apply to public schools, too?

In any case, D.C. public schools spend nearly $25,000 per pupil, whereas the federally funded DC Opportunity Scholarship Program costs taxpayers only $7,500 per student. It seems that, at the very worst, expanding school choice could save taxpayers money without sacrificing educational achievement.

Further, a new study by the University of Arkansas finds that parents and students are overwhelming satisfied with the schooling they receive through the DC Opportunity Scholarship Program. Heritage researcher Lindsey Burke sums up the University of Arkansas study:

Families feel that their children are safer, have a better attitude toward school, and are excelling academically. The greatest concern among families appears to be that their children are flourishing in the program but may not be permitted to stay due to the limited amount of slots available at the middle and high school levels. The report indicates that DCOSP parents move from the margins of their children’s academic lives to the forefront. Perhaps most notably, “it appears that parent satisfaction stems more from the opportunity to make a choice for their child’s education and participate in the program, rather than from concrete academic test results or grades or other outcomes.”

The New York Timesreports today that the Obama administration has secretly suggested to Russia’s leaders that it would back off of plans to deploy missile defense systems in Poland and the Czech Republic if Russia were able to use its influence with Iran to prevent Iran from developing long-range weapons. But, as Heritage Vice President Kim Holmes argued when he anticipated this development two weeks ago, the linkage to Iran reveals a misunderstanding about what is at stake:

… the decision made by our Eastern European allies encompassed more than just the desire to defend their citizens against Iran. The Poles and Czechs saw it as a test case of the American and NATO commitment to their defense against a bullying Russia.

Moscow has threatened both countries with offensive nuclear missiles – a breathtakingly aggressive response to purely defensive weapons intended for protection from Iran – all for the purpose of asserting a false claim of influence over the affairs of two NATO allies. …

The long-range damage, though, would be to the credibility of the NATO alliance itself. If Russia succeeds in vetoing the missile defense decision, then NATO will inevitably be seen as a two-tier alliance – one for members outside Russia’s sphere of influence and another for those inside it. Moscow’s geopolitical claim to special consideration in Poland, the CzechRepublic and Baltic States will be confirmed. After all, what business is it of Russia if these countries want to protect themselves from Iran?

A new law has turned billions of dollars worth of inventory into unsalable junk and a headache for retailers. The Consumer Product Safety Improvement Act, which passed last year and went into effect on February 10, was supposed to assure consumers that products for kids contain only safe levels of lead and phthalates (a component of plastic). Instead, the new law’s more rigorous standards may leave consumers looking at empty shelves. That’s because the standards apply not only to newly manufactured items, but to existing inventories, too. Merchants, afraid of being hit with newly bolstered criminal penalties for non-compliance, are now discarding the merchandise on their shelves. At the blog Overlawyered, Walter Olson tracks the daily reports of impacted retailers, which include bookstores, dealers of kids motorcycles and ATVs, consignment shops, thrift stores, craft suppliers, and toy dealers. The law will even apply to ballpoint pens intended for use by children. Some shops are shutting down. A trade association estimates that the law will yield $1 billion in lost inventory for dealers of kids motorcycles and ATVs alone.

In addition to creating rigorous new standards, the law also mandates that new products be tested for lead and phthalate content by third parties. Each item must also be stamped with a lot number. Small manufacturers and makers of handcrafted items argue that complying with the lot-number and testing requirements would be prohibitively expensive and force them out of business. Recognizing how draconian these requirements could be for some manufacturers, the Consumer Product Safety Commission voted to put off the law’s testing and certification requirements until February 2010 for a number of products, including toys and garments. Still, the requirements have caused German toymaker Selecta to pull out of the U.S. market. Selecta, which complies with European standards on phthalates, says compliance with the U.S. standards would cause a 50 percent increase in the price of its products. Honda, Kowasaki, and Yamaha have also announced they will stop selling motorcycles and ATVs for kids in the U.S. market. Olson comments: “of all the imaginable safety hazards posed by the existence of youth motorcycles and ATVs, the danger that kids will eat the darn things must rank at the very bottom.”

The CPSC has also advised bookstores to remove any books published prior to 1985, because the inks commonly used before that time contained too much lead. The law would especially impact book mongers whose stock is more likely to contain older volumes, such as second-hand dealers, Internet sellers, and libraries. The American Library Association has announced that unless the CPSC says otherwise, it will assume the law does not apply to libraries. Olson thinks CPSC will have to tell the ALA otherwise, since “the law bans the ‘distribution’ of forbidden items, whether or not for profit.” Unless an old title is still in print, destroying it means making that title extinct. The testing requirements may also make publishing in small lots uneconomical, which would undercut publishers’ print-on-demand efforts to keep more titles in print.

Congress had scheduled a hearing this week to listen to concerns about the law, but cancelled the event. Olson speculates: “Someone must have realized that letting people from around the country get in front of a microphone and talk about the effects of this law would not exactly do wonders for the image of Henry Waxman, Public Citizen, PIRG, or Consumer Federation of America.”